December's retail figures may tell us many things about the UK economy, but one, I am confident, is that affordability remains an ongoing issue for homeowners. When money is tight, people naturally prioritise. They also then look to experts to reduce the household's significant outgoings, which invariably includes the mortgage.

Affordability remains a crucial battleground of lending. While interest rates (expressed through swap rates and fixed rate pricing) have been falling, inflation remains more stubborn[1]. The 4% figure for December was a surprise to many - especially given those retail sales figures - and the Bank of England has already spoken about how cutting rates is not a quick fix. The good news is that it remains way below October's figure. The unexpectedness of the rise probably turned more heads than the size of the increase itself from November's 3.9%[2].

The conclusion for borrowers rolling off two-year and three-year deals secured in cheaper times is that affordability will remain an issue for some time yet – particularly if, like most borrowers these days, their affairs are not straightforward, and the labour market is softening.

We can trace the current woes back a couple of years to Autumn 2022 when lenders moved en masse to reassess affordability in light of that budget. From the outset, most lenders reviewed the data feeds they were getting from the Office of National Statistics, which works well enough in times of stability. The data, though, is not timely, often on six-month or annual feeds, and so the onset of the cost-of-living crisis prompted some urgent action.  The result was that some effectively exited themselves from the market and needed to rethink their decisions in the light of re-pricing and looking at criteria, too. Many lenders added a notional 10% across the board, but now this is more nuanced in many cases. Lenders may apply uplifts in discrete areas and review their decisions quarterly or more often as circumstances demand[3].

Lenders are investing a lot of time and effort into this area to improve their understanding of borrower affordability, and many systems to help with income are becoming available, such as Automated Income Verification, payroll, and HMRC data. However, it is harder to navigate when affordability remains the least visible part of the product mix.

These are interesting times for brokers and lenders. Affordability has played a fundamental part in the growth of Product Transfers as stretched borrowers seek to secure cheaper new deals without undergoing new stress tests on their borrowings. But the slow descent in the cost of borrowing means some alternatives may now represent a better bet than Product Transfers. And Consumer Duty will undoubtedly challenge the practice of allowing borrowers to roll over if something better is available. All lenders will not move in step on affordability and criteria this year, so looking around will pay dividends.

[1] https://www.forbes.com/uk/advisor/personal-finance/2024/01/17/inflation-rate-update/

[2] https://www.statista.com/statistics/306648/inflation-rate-consumer-price-index-cpi-united-kingdom-uk/

[3] 2023 IRESS Mortgage Efficiency Survey https://theintermediary.co.uk/2023/09/affordability-remains-a-key-battleground-for-lenders-says-iress/

Lenders are investing a lot of time and effort into this area to improve their understanding of borrower affordability, and many systems to help with income are becoming available, such as Automated Income Verification, payroll, and HMRC data. However, it is harder to navigate when affordability remains the least visible part of the product mix.

These are interesting times for brokers and lenders. Affordability has played a fundamental part in the growth of Product Transfers as stretched borrowers seek to secure cheaper new deals without undergoing new stress tests on their borrowings. But the slow descent in the cost of borrowing means some alternatives may now represent a better bet than Product Transfers. And Consumer Duty will undoubtedly challenge the practice of allowing borrowers to roll over if something better is available. All lenders will not move in step on affordability and criteria this year, so looking around will pay dividends.